Don't Blow Your Exemption: What Founders Get Wrong About 506(b), 506(c), and General Solicitation

Most founders know they need to raise money under some kind of securities exemption. Fewer understand that the exemption they think they're using can be silently destroyed by a single LinkedIn post—or even a page on their own website—before a single dollar is raised.

This is happening more than you'd expect. And the consequences don't surface immediately, which makes the problem worse. They show up months later in diligence for your next round, or when a nervous acquirer's counsel spots the issue, or when an early investor who lost money realizes they have a rescission claim.

Here's what you need to understand—and what to do about it.

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The Framework: Why Exemptions Matter

When a company raises capital by issuing securities—equity, SAFEs, convertible notes, any of it—it is engaged in a securities offering under federal law. The Securities Act of 1933 requires that all such offerings either be registered with the SEC or qualify for an exemption from registration.

Registration is expensive, time-consuming, and designed for public companies. Essentially every startup raise uses an exemption.

The most commonly used exemption is Regulation D, specifically the two private placement rules under it: Rule 506(b) and Rule 506(c). These allow companies to raise an unlimited amount of capital from investors without SEC registration, as long as they play by the rules.

The rules are different for each. And confusing them—or playing in the 506(b) lane while accidentally behaving like a 506(c) issuer—is where founders get into serious trouble.

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506(b) vs. 506(c): The Core Tradeoff

Think of the two rules as a single tradeoff with two sides:

	Rule 506(b)	Rule 506(c)
General solicitation	❌ Prohibited	✅ Permitted
Who can invest	Unlimited accredited investors + up to 35 sophisticated non-accredited investors	Accredited investors only
Investor verification	Self-certification (investor checks a box)	Issuer must independently verify accredited status
Pre-existing relationship	Required with every offeree	Not required
Available since	1982	2013 (JOBS Act)

Rule 506(b) is the default for most startup raises. It's simpler, it allows a handful of sophisticated-but-not-technically-accredited investors, and it doesn't require the issuer to independently verify anyone's financial status. The tradeoff: you cannot advertise the offering, and you can only approach people with whom you have a pre-existing, substantive relationship.

Rule 506(c) lets you market publicly—social media, webinars, conferences, anywhere. The tradeoff: every single investor must be independently verified as accredited before they can participate. Self-certification isn't enough.

Most venture-backed startups default to 506(b). Which means most are subject to the general solicitation prohibition. And many don't realize what that prohibition actually covers.

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What "General Solicitation" Actually Means

The SEC has never defined "general solicitation" with a bright-line test. It's determined case by case, based on the totality of the circumstances. That ambiguity is itself a warning: when the rules are fuzzy, err conservative.

The following are generally considered general solicitation under 506(b):

• Social media posts mentioning the offering—LinkedIn, X/Twitter, Instagram, Facebook
• Public announcements that you're fundraising, have raised, or are seeking investors
• Websites or landing pages that describe investment terms or invite investor inquiries from the general public
• An "Investors" or "Invest with us" page on your company website, open to anyone
• Press releases announcing a round or seeking investors
• Mass emails to lists where no pre-existing relationship exists
• Seminars or webinars open to the general public that include discussion of the offering
• Cold outreach—emails, DMs, calls—to anyone you don't already know

The broader principle: if someone who has never heard of you can access offering information through an impersonal, non-selective channel, that's likely general solicitation.

What About Your Company Website?

This is where many founders stumble without knowing it. Your company's marketing website can discuss your product, your team, your mission. What it cannot do—if you're relying on 506(b)—is describe your securities offering or invite members of the public to become investors.

The SEC has said that a sponsor's website may include factual business information as long as it does not "condition the public mind or arouse public interest in a securities offering." An "Investors" page with details about your round, projected returns, or a contact form inviting investor inquiries almost certainly crosses that line.

What's Not General Solicitation

• Direct outreach to investors with whom you already have a substantive, pre-existing relationship
• Introductions facilitated by your existing investors, advisors, or legal counsel
• Pitching at a qualifying demo day (see below)
• A password-protected investor data room shared only with known prospects

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The "Pre-Existing, Substantive Relationship" Requirement — and Its Nuances

This is the piece that securities lawyers argue about most, and where the actual practice of startup fundraising is more flexible than a strict reading suggests.

The starting point: under 506(b), you generally should not offer securities to someone with whom you have no prior relationship. But the SEC has been explicit that a pre-existing relationship is "one means, but not the exclusive means" of demonstrating the absence of a general solicitation. (C&DI Q 256.26, post-JOBS Act). It is not an absolute rule.

What "Substantive" Actually Means

A relationship is "substantive" when you (or your broker-dealer or investment adviser) have gathered and actually evaluated enough information about the person to assess their financial sophistication or accredited investor status. The quality of the relationship matters more than how long it has existed. A checkbox self-certification alone is not enough—you need to have done a genuine evaluation.

What "Pre-Existing" Actually Means — And Where the Nuance Lives

This is where it gets interesting. "Pre-existing" means before you pitch—but not necessarily months before, and not necessarily before you started thinking about your raise.

The SEC's 2015 Citizen VC guidance established that you can build relationships during a fundraise, as long as:

• You do not present any investment opportunity to the person while the relationship is being established
• Some passage of time occurs between establishing the relationship and making the pitch (30 days is the common practitioner benchmark, though no statutory minimum exists)
• The relationship-building involves genuine evaluation of the investor's circumstances—not just a cursory intake form

In plain terms: you can meet someone new in the context of your raise, spend time getting to know them, assess whether they'd be a fit, and then pitch them—as long as you didn't lead with the pitch.

Warm Introductions: The Normal Path

Most seed and Series A rounds involve exactly this: a founder meets new investors through warm introductions from existing investors, mutual advisors, or board members. This is standard practice and generally compatible with 506(b).

When a trusted intermediary—an existing investor, an advisor, a placement agent—makes a personal introduction, their relationship with the new prospect can satisfy the standard on your behalf. The introducer knows the investor, has a basis for vouching for them, and the referral creates the kind of selective, non-public contact that 506(b) contemplates.

What qualifies:

• Angels, VCs, or family offices you've known for months or years
• Warm introductions from existing investors or your company's advisors, counsel, or financial professionals
• Investors surfaced through a registered broker-dealer or placement agent who has conducted proper suitability screening
• New contacts you've genuinely gotten to know before pitching, with a real evaluation of their sophistication

What doesn't:

• Cold DMs or cold emails to people you've never interacted with
• Someone who signed up for your email list from your public website
• Mass outreach to investor databases or curated "accredited investor" lists you purchased
• New introductions where you led with the pitch in the first conversation

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Demo Days and Pitch Events: A Limited Safe Harbor

The SEC has carved out a specific exception for qualifying demo day events. You can pitch at a demo day without triggering general solicitation rules if:

• The event is organized by a college, university, state or local government, nonprofit, angel investor group, incubator, or accelerator
• The sponsor's role is limited to serving as host
• Advertising for the event does not reference any particular securities offering
• Information shared at the event is limited to: notification that an offering is planned or ongoing, the type and amount of securities, intended use of proceeds, and unsubscribed amount

This safe harbor is narrow. A pitch competition run by a private company, or a startup event where anyone can buy a ticket and hear your pitch, likely doesn't qualify. If you're pitching at a broadly marketed event, you may be in 506(c) territory whether you intended to be or not.

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The Stakes: What Happens If You Blow It

This is where the consequences become real.

Rescission Liability

When a securities offering loses its exemption, every investor who participated may have a right of rescission—meaning they can demand their money back, plus interest, regardless of how the company is performing. Under Section 12(a)(1) of the Securities Act, investors who purchased in an unregistered, non-exempt offering have that right for up to three years from the date of purchase.

This is not theoretical. The right exists, and plaintiffs' counsel knows how to find it.

SEC Enforcement

A failed exemption means the offering may constitute an unregistered securities offering in violation of Section 5 of the Securities Act. The SEC can bring enforcement actions, and founders can face personal liability. Most enforcement actions targeting small issuers result in cease-and-desist orders and disgorgement of proceeds, but more serious cases can result in civil penalties.

Future Fundraising and M&A Diligence

This is the most common way the problem actually surfaces. Sophisticated investors and acquirers conduct securities law diligence. They will ask about prior offerings, and they will look for red flags. A botched 506(b) raise—especially one where general solicitation is evidenced by a public post that still exists somewhere on the internet—is the kind of contingent liability that can delay or kill a deal.

At minimum, you'll be asked to disclose the issue, explain it, and potentially escrow funds to cover potential rescission claims. At worst, the deal doesn't close.

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Concrete Guidelines for Founders

Before You Raise: Choose Your Exemption First

The biggest mistake is starting to talk about your raise before deciding which exemption you're using. Here's a simple decision framework:

Use 506(b) if:

• You're raising from a tight network of people you already know
• You prefer simpler investor verification (self-certification)
• You want the option to include a small number of sophisticated non-accredited investors

Use 506(c) if:

• You want to post about your raise publicly or market it broadly
• You don't have deep existing investor relationships
• You're comfortable with independent verification for every investor (typically $30–$75/investor through third-party services like Verify Investor or Parallel Markets)

The critical rule: choose before you speak. Once you've made a public announcement, you may have already locked yourself into 506(c)—even if you didn't intend to.

If You're Using 506(b)

1. Say nothing publicly. No LinkedIn posts, no X/Twitter threads, no press releases about the raise. If journalists or followers ask, you can confirm you're growing—don't confirm you're raising.
2. Remove or restrict your "Investors" page if it's publicly accessible. Or don't publish one at all until you're sure you're using 506(c).
3. Keep a contact log. Document when you first met each investor, how you were introduced, and the nature of your prior conversations. This matters if your exemption is ever challenged.
4. Leverage warm introductions freely—but intentionally. Meeting new investors through referrals from existing investors, advisors, or mutual connections is totally normal under 506(b). The key is that the introduction is personal and selective, not a broadcast. Lead with relationship-building; pitch after you've had a chance to evaluate them.
5. Don't lead with the pitch. If your first conversation with a new investor is "we're raising and here are the terms," that's the riskier territory. Spend a meeting or two learning about each other before presenting the opportunity formally.
6. Be careful with event pitches. If the event is broadly marketed and the audience is general, don't discuss offering specifics. Save that for private follow-up meetings with people you qualify.

If You're Using 506(c)

1. Verify every investor independently before accepting their funds. Accredited investor self-certification is not sufficient—it's the one thing that will disqualify your 506(c) offering.
2. Use a third-party verification service. Services like Verify Investor or Parallel Markets handle document review and issue written confirmation, shifting the compliance burden off you and creating a clean audit trail.
3. No non-accredited investors, period. There is no sophistication exception under 506(c).
4. File Form D within 15 days of first sale. This is required under both rules and is not optional.

If You've Already Made a Public Post

Stop. Call your securities counsel before you do anything else.

Your options depend on the timing and nature of what was posted:

• If no sales have occurred: You may be able to withdraw or restructure the offering, wait out a "cooling off" period (the SEC hasn't defined an exact timeframe, but some practitioners suggest 30 days of inactivity), and re-launch under 506(c).
• If sales have occurred during or after the solicitation: The exemption may already be lost. You'll need to evaluate your exposure, consider whether rescission offers are warranted, and decide how to disclose going forward.
• In either case: Do not simply delete the post and hope no one noticed. The post may already be indexed, archived, or screenshot. The cure is legal strategy, not erasure.

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The Bigger Picture

There's a cultural problem here. Startup fundraising has become a kind of performance—announce the round on social, celebrate the milestone, post the founder thread. That culture is in direct tension with the securities laws governing how most startup rounds actually work.

The fix isn't silence. It's sequencing. Announce that you closed a round—that's fine, and entirely normal. What you can't do under 506(b) is announce that you're seeking investors to a general audience.

Celebrate publicly. Solicit privately.

The other thing worth noting: talking to a securities lawyer before you raise is cheap compared to talking to one after you've blown the exemption. The structure of your offering is a decision with multi-year consequences. It deserves more than a casual assumption that "we'll do a standard Reg D raise" made in a team meeting before anyone's thought about what that actually means.

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This post is general educational information and does not constitute legal advice. Securities law is fact-specific. If you're structuring a capital raise, work with qualified securities counsel.